Enterprise and Equity Value In DCF Financial Model

Enterprise and Equity Value In DCF Financial Model

What is an Enterprise Value?

Enterprise value shows how much a business is worth. It is useful in comparing companies with different capital structures since the capital structure doesn’t affect the value of a firm.

Businesses calculate enterprise value by adding up the market capitalization, or market cap, plus all of the debts in the company. For example, debts may include interest due to shareholders, preferred shares, and things that the company owes. Then, subtract any cash or cash equivalents that the business currently holds. In the end, you get the enterprise value. For instance, think of enterprise value as a business’ balance sheet, accounting for all of its current stocks, debt, and cash.

What is an Equity Value?

Equity value constitutes the value of the company’s shares and loans that the shareholders made available to the business. The calculation for equity value adds enterprise value to redundant assets (non-operating assets). Then, it subtracts the debt net of cash available. Eventually, we can break down the total equity value into the value of shareholders’ loans and (both common and preferred) shares outstanding.

How to calculate the Enterprise and Equity Value in Financial Modeling?

Let’s calculate Enterprise and Equity Value in our sample financial model in the example below. Thus, the calculation will consist of five steps:

  1. Calculate the Net Present Value of Unlevered Free Cash Flow
  2. Find the Terminal Value of the company
  3. Calculate the Present Value of the Terminal Value
  4. Determine the Enterprise Value of the company
  5. Find out the Equity Value

1. Calculate the Net Present Value of Unlevered Free Cash Flow

The first thing we need is to calculate the NPV of UFCF. Net present value (NPV) helps to find today’s value of a future stream of cash flows. It accounts for the time value of money. In other words, the concept that money available at the present time is worth more than the identical sum in the due to it’. We need to use Excel function NPV here.

=NPV (rate, value1, [value2], …), where:
rate – Discount rate over one period.
value1,2 – Values representing cash flows.

You can find the calculation of the NPV of Unlevered free cash flow for our model in the screenshot below.

Enterprise and Equity Value
Enterprise and Equity Value

2. Find the Terminal Value of the company

Terminal value (TV) is the value of a business or project beyond the forecast period when future cash flows can be estimated. Besides, it assumes the business will grow at a set growth forever after the forecast period. Here’s the formula to calculate terminal value:

Terminal Value = (Unlevered FCF for the last projected year* ( 1 + Growth Rate ))/ ( WACC – Growth Rate)

You can find the calculation of Terminal Value for our sample model in the screenshot below.

Enterprise and Equity Value
Enterprise and Equity Value

3. Calculate the Present Value of the Terminal Value

Present Value (PV) of Terminal Value (TV) brings calculated Terminal Value into today’s dollar amount. We need to use the Excel function PV:

=PV (rate, nper, pmt, fv)
rate – The interest rate per period (WACC)
nper – The total number of payment periods (5 years for our model)
pmt – The payment made each period (0 in our case)
fv – Future Value (Terminal Value

You can find the calculation of the Present Value of Terminal Value for our sample model in the screenshot below.

Enterprise and Equity Value
Enterprise and Equity Value

4. Determine the Enterprise Value of the company

Enterprise Value (EV) is the measure of a company’s total value. It looks at the entire market value rather than just the equity value. Therefore, we include all ownership interests and asset claims from both debt and equity. Here’s the formula to calculate enterprise value for financial models:

Enterprise Value = NPV of Unlevered FCF + PV of Terminal Value

You can find the calculation of Enterprise Value for our sample model in the screenshot below.

Enterprise and Equity Value
Enterprise and Equity Value

5. Find out the Equity Value

Equity Value is the value of a company available to owners or shareholders. It is the Enterprise Value plus all cash and cash equivalents, short and long-term investments. Then, less all short-term debt, long-term debt, and minority interests. Here’s the formula to calculate equity value:

Equity Value =Enterprise value – Debt + Cash

You can find the calculation of Equity Value for our sample model in the screenshot below:

Enterprise and Equity Value
Enterprise and Equity Value

Conclusion

  • Enterprise value and equity value may both be used in the valuation or sale of a business. But each offers a slightly different view.
  • Businesses calculate enterprise value by adding up the market capitalization, or market cap, plus all of the debts in the company.
  • The calculation for equity value adds enterprise value to redundant assets. Then, it subtracts the debt net of cash available.

Learn more on how to improve your Financial Modeling skills with a few tips and tricks in Excel. keySkillset is one of the best solutions to help you advance in your career.

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